Oct. 29 (Bloomberg) -- Hungary’s central bank cut its
benchmark interest rate to a record and said the outlook for
inflation and economic growth justifies further easing.

The Magyar Nemzeti Bank cut the two-week deposit rate to
3.4 percent from 3.6 percent at a meeting today, matching the
forecasts of 21 of 22 economists in a Bloomberg survey.

“Further cautious easing of monetary conditions may
follow,” the rate-setting Monetary Council said in a statement.

Policy makers have lowered borrowing costs for 15 straight
months, slashing the benchmark by more than half to buoy
recovery from a recession last year. To help tame prices, the
government has imposed a one-fifth reduction in utility costs in
2013. The U.S. Federal Reserve’s decision to maintain its
stimulus program has eased market volatility, the Hungarian
central bank said.

The forint, which has gained 1.5 percent in the past month,
the best performance among 24 emerging-market currencies tracked
by Bloomberg, traded at 293.73 per euro as of 3:20 p.m. in
Budapest. The yield on the benchmark government bond due 2023
dropped to 5.35 percent from 5.9 percent a month ago.

Emerging-market assets have rallied after the U.S. central
bank maintained its $85 billion of monthly bond purchases in
September. Following a partial U.S. government shutdown this
month, the Fed will delay tapering its stimulus until March,
according to an Oct. 17-18 survey of economists by Bloomberg.

Easing Room

Rate-setters today cited subdued economic growth and the
slowest inflation in almost 40 years as driving rate cuts.

“Low CPI pressure and delayed Fed tapering created room
for further easing,” Orsolya Nyeste and Gergely Gabler,
Budapest-based economists at Erste Group Bank AG, said by e-mail. They forecast the main rate at 3 percent by year-end.

Forward-rate agreements used to wager on three-month
Hungarian interest rates in three months rose 2 basis points to
3.12 percent. That compares with the 3.54 percent Budapest
interbank offered rate, indicating bets for about 40 basis
points of rate cuts in the next three months.

Eastern European central banks are diverging as their
economies show varying degrees of health. Poland left borrowing
costs at a record low for a second meeting this month as policy
makers assess recovery from a slowdown, while Romania cut its
benchmark for a third month on Sept. 30 to bolster growth.

Growth, Inflation

“There remains a significant degree of unused capacity in
the economy and inflationary pressures are likely to remain
moderate over a sustained period,” the Monetary Council said.

Gross domestic product rose 0.1 percent from the previous
three months in the second quarter after a 0.6 percent advance
in the January-March period.

In addition to rate cuts, the central bank is providing
2.75 trillion forint ($13 billion) of interest-free funds to
commercial lenders to boost credit to small and medium-size
companies. The government forecasts 2 percent growth in 2014.

The inflation rate, which increased to 1.4 percent in
September from 1.3 percent the previous month, has remained
below the central bank’s 3 percent medium-term target since
February.

Price pressure eased after the government, which faces
elections in 2014, ordered an 11.1 percent cut in utility
charges starting next month, adding to a 10 percent reduction at
the start of this year. At the same time, the core inflation
rate, which strips out volatile food and energy price swings,
rose to 3.5 percent from 3 percent in August.

Shifting Perceptions

A “sustained and marked shift” in investors’ risk
perceptions of Hungary may affect the central bank’s room for
for policy maneuver, the monetary authority said today.

A recovering economy, rising core inflation and investor
concern for how Prime Minister Viktor Orban wants to phase out
billion of dollars in household foreign-currency mortgages may
mean the central bank is nearing the end of its rate-cut cycle,
Capital Economics Ltd. said in an e-mail.

The government plans to unveil its mortgage plan by early
November after rejecting proposals by lenders. The country’s
banks lost $1.7 billion during a 2011 program and reacted by
pulling out capital equal to 23 percent of GDP and cutting new
lending.

“A repeat of these events would bring the current easing
cycle to a halt, if not into reverse,” said William Jackson, a
London-based economist at Capital Economics. “For now though,
assuming that the banks and government can reach some form of
agreement, and the euro zone avoids a fresh crisis, we expect
two more 20 basis-point interest-rate cuts this year.”